The COVID-19 crisis is evolving into a payment crisis. Companies are inclined to delay payments to suppliers to protect working capital, and the risks of default and bankruptcy are looming. Companies need to understand structural payment patterns to identify and avoid bad payers and find paths to restore growth.
A survey conducted last year by Euler Hermes Asia-Pacific involving 171 CFOs and finance directors showed that 73% of companies suffered from unpaid receivables to varying degrees, and 82% experienced delayed payments. The survey was conducted from December 2019 to February 2020, and only 25% of respondents used trade credit insurance as a risk mitigation tool.
The Gap in Trade Credit Risk Protection in the Asia-Pacific Region
Trade credit insurance is an effective credit risk mitigation tool, crucial for identifying new sales opportunities, confidently growing the business, and protecting cash flow. However, only about 5% of companies in the Asia-Pacific region purchase trade credit insurance, far lower than mature markets such as Western Europe. There are significant differences in trade credit risk management maturity across the Asia-Pacific region. In mature markets like Australia, Hong Kong, Singapore, and Japan, large enterprises and multinational corporations generally adopt some form of trade credit risk management. Emerging markets such as Malaysia, Indonesia, Thailand, and China lack this knowledge, with companies relying mostly on self-insurance; this inefficient cash flow management method hinders growth. The core gap in the Asia-Pacific region lies in the insufficient awareness among SMEs regarding trade credit risk protection.
What is Trade Credit Insurance?
Trade credit insurance, also known as accounts receivable insurance, protects companies when customers fail to pay trade debts.
The Importance of Trade Credit Insurance
Trade debts or accounts receivable can account for 40% or more of a company's assets. A few defaults can seriously affect cash flow. For example, a company with a profit margin of 5% that suffers $100,000 in bad debt needs to generate an additional $2 million in sales to make up for the loss. Bad debt can also weaken financial standing in other ways, such as reducing investment capacity, leading banks and financial suppliers to raise interest rates, or affecting morale due to employee concerns about business prospects. These consequences are worth considering when weighing the costs and benefits of trade credit insurance.
Scenarios where investing in trade credit insurance is considered include:
- Increase sales safely and confidently with new and existing customers
- Secure better financing terms to seize more revenue opportunities
- Maintain cash flow and profitability by reducing bad debt risk
- Make the best business decisions by accessing risk data
- Protect the company from unpaid amounts and catastrophic losses
- Expand into international markets with the help of insurers' export risk and market knowledge
- Reduce bad debt provisions and release capital
